Commercial real estate investors remain drawn to triple net lease (NNN) properties, with net lease transaction volume reaching $85 billion in 2023, representing a significant portion of the commercial investment market. But what makes these investments so compelling that seasoned investors return to them again and again?
The answer lies in their unique combination of passive income potential, predictable returns, and tenant responsibility structure. Let’s explore a real-world example that illustrates exactly why triple net leases have become a cornerstone of many successful investment portfolios.
What Is a Triple Net Lease?
A triple net lease (NNN) is a commercial lease agreement where the tenant assumes responsibility for three major property expenses beyond their base rent: property taxes, insurance, and maintenance (the “three nets”). This structure shifts the burden of operating expenses from the landlord to the tenant, creating a more predictable income stream for property owners.
Unlike traditional commercial leases, where landlords handle these expenses, NNN leases provide investors with cleaner cash flow and reduced management responsibilities. The tenant typically handles everything from routine maintenance to major repairs, making these investments particularly attractive to investors seeking passive income opportunities.
Why Triple Net Leases Remain Popular
The enduring appeal of triple net lease investments stems from several key advantages:
Predictable Cash Flow: With tenants covering property expenses, investors receive consistent monthly income with minimal fluctuation. This stability makes NNN properties ideal for portfolio diversification and retirement planning.
Reduced Management Burden: Barring major issues, property management responsibilities largely fall to the tenant, freeing investors from day-to-day operational concerns like maintenance calls or contractor coordination.
Long-Term Security: NNN leases often feature extended terms (10-25 years) with built-in rent escalations, providing long-term income visibility and protection against inflation.
Credit-Worthy Tenants: Many NNN properties house established national or regional tenants with strong credit profiles, reducing the risk of default or vacancy.
A Triple Net Lease Example
Consider this hypothetical but realistic example that demonstrates the NNN advantage in action:
The Property: A 5,200 square foot freestanding retail building in suburban Phoenix, housing a national pharmacy chain.
The Investment Details:
- Purchase price: $2.1 million
- Initial cap rate: 6.2%
- Annual base rent: $130,200 ($25 per square foot)
- Lease term: 15 years with four 5-year renewal options
- Annual rent increases: 1.5% compounded
The Triple Net Structure in Action:
Under this NNN lease, the pharmacy tenant assumes all responsibility for:
- Property taxes (approximately $18,000 annually)
- Property insurance (approximately $8,500 annually)
- All maintenance and repairs (estimated $12,000+ annually)
This means the investor receives the full $130,200 in annual rent without deducting these typical landlord expenses — creating a true net income of 6.2% on their investment.
The Long-Term Benefits:
Over the initial 15-year term, this investment demonstrates the compound benefits of NNN leases:
- Year 1 net income: $130,200
- Year 10 net income: $150,900 (due to 1.5% annual increases)
- Year 15 net income: $162,400
- Total income over 15 years: $2.28 million
Meanwhile, the investor avoided approximately $577,500 in property expenses that would have reduced returns in a traditional lease structure.
Risk Mitigation: The national pharmacy chain’s strong credit rating (investment grade) virtually eliminates default risk, while the long-term lease with renewal options provides income security extending potentially 35 years.
The Compound Effect
What makes this triple net lease example compelling is how the benefits compound over time. Not only does the investor receive consistent, growing income, but they also benefit from:
- Appreciation potential: The property’s value typically increases alongside rental income growth
- Inflation hedge: Annual rent escalations help preserve purchasing power
- Minimal capital expenditures: Major improvements often become the tenant’s responsibility
After 15 years, our hypothetical investor has received their initial investment back through cash flow while still owning an appreciating asset with potential for lease renewal or sale.
Why Experience Matters in NNN Investing
While triple net leases offer compelling advantages, success requires careful due diligence and market expertise. Critical factors include tenant creditworthiness, lease structure analysis, location demographics, and understanding the specific terms that govern expense responsibilities.
The complexity of NNN transactions — from initial underwriting to lease negotiation — benefits significantly from experienced guidance. Working with advisors who understand the nuances of net lease investments can mean the difference between a good investment and a great one.
Exploring Your NNN Investment Options
Triple net lease properties continue attracting investors because they deliver on their fundamental promise: predictable, passive income with minimal management hassles. Whether you’re a seasoned investor looking to diversify your portfolio or exploring your first commercial real estate investment, NNN properties offer a compelling combination of stability and growth potential.
At SVN, our tenant investment specialists understand the intricacies of triple net lease transactions. From identifying opportunities that match your investment criteria to navigating complex lease structures, our collaborative network ensures you have access to both local market expertise and national deal flow.
Ready to explore how triple net lease investments might fit your portfolio? Connect with our team to discuss your investment goals and discover the opportunities available in today’s market.
The financial figures presented in this example are hypothetical and for illustrative purposes only. Actual investment results will vary based on numerous factors, including market conditions, property specifics, and tenant performance. Always conduct thorough due diligence and consult with qualified professionals before making investment decisions.